Fitch raises Iceland’s long-term debt rating

PARIS — The international ratings agency Fitch raised Friday its assessment of Iceland’s long-term sovereign debt rating from junk to investment grade and said the outlook was stable.

Fitch raised Iceland’s rating by one notch, from “BB plus” to “BBB minus,” saying the decision “reflects the progress that has been made in restoring macroeconomic stability, pushing ahead with structural reform and rebuilding sovereign creditworthiness.

“The outlooks on the long-term ratings are stable,” Fitch added.

The agency noted that Iceland had successfully made it through an economic reform program drawn up with the International Monetary Fund (IMF) and was now able to access global capital markets again.

“A promising economic recovery is underway, financial sector restructuring is well-advanced, while public debt/gdp (gross do- mestic product) appears to be close to peaking on the back of a robust fiscal consolidation program,” the report’s lead author Paul Rawkins said. Iceland, “the first country to suffer the full force of the global financial crisis,” has largely been spared fallout from the eurozone debt crisis, he noted.

In what some might be tempted to consider an example for debt-laden Greece, Iceland has bounced back after letting commercial banks fail and making its labour and product markets more flexible.

“Despite some setbacks along the way, the (IMF) program laid the foundations for renewed access to international capital markets in mid2011 and an encouraging rebound in economic growth to 3.0 per cent for 2011 as a whole,” Rawkins noted. “Flexible labour and product markets and a floating exchange rate have facilitated the correction of external imbalances and contained the rise in unemployment, while the financial system has shrunk to one fifth of its former size.”

More than three years after Iceland’s banks collapsed and the country teetered on the brink of bankruptcy, its economy is in recovery, leading some analysts to argue that governments should let failing lenders go bust and protect taxpayers. The North Atlantic island saw its three biggest banks go belly-up in the October 2008 as its overstretched financial sector collapsed under the weight of the global crisis sparked by the crash of US investment giant Lehman Brothers.

The banks became insolvent within a matter of weeks and Reykjavik was forced to let them fail and seek a $2.25 billion bailout from the IMF. But Fitch said it believed that the country’s gross general government debt might have peaked at around 100 per cent of GDP and that its net debt is now “significantly lower at around 65 per cent of GDP.”

The central bank has raised its benchmark interest rates since early August, but Fitch “does not expect Iceland to slip back into recession,” it said.